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Friday, May 11, 2012

Automated trading restrictions: are they a presumption of guilt?

Posted by John Bates

John BatesAnyone who’s seen the news in recent months will know that High Frequency Trading is facing a sharp increase in the number of regulatory challenges, with some tough measures suggesting that it has been presumed guilty until proven innocent by many. ESMA, implemented in Europe in May 2012, is the latest set of regulatory guidelines around the systems and controls required in an automated trading environment. But are these regulations fair?

It seems clear that, with the ever-increasing volumes of data that firms need to manage and monitor in order to catch abuse, Europe has decided to take a firm stance on automated trading. But is all this a case of, as my colleague Richard Bentley suggests, using a sledgehammer to crack the nut?

Shutterstock_48500095Clearly, increasing red tape will place a significant burden on firms and may, if we’re not careful, lead to a situation of regulatory arbitrage, or lock those without deep pockets out of the market. Perhaps a better answer is to adopt a three-layered approach to surveillance where the brokers, trading venue and regulators all have a different role to play will help stamp out abuse without necessarily stubbing innovation?

On a recent visit to London, I met with Phillip Stafford at the Financial Times Trading Room to discuss EU market abuse regulations as can be seen in the video here.



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